2 Options Plays Before Priceline Earnings

by Joseph Hargett | August 8, 2013 9:42 am

Wall Street is putting its trays and seat-backs in their upright and locked positions today, as online travel firm Priceline.com (PCLN[1]) prepares to land and offer up its second-quarter earnings report.

Analysts are expecting Priceline earnings to come in at $9.37 per share on revenue of $1.65 billion. Both figures are well above Priceline’s current guidance for earnings of $8.87 to $9.45 per share and revenue of $1.495 to $1.586 billion.

Wall Street’s optimism might stem from Priceline’s excellent first-quarter performance, where the company easily topped the consensus expectations, a stabilizing European economy, the company’s expansion into Asia, and growth in the U.S. economy.

Additionally, mobile revenue will figure greatly in Priceline’s quarterly report. The company announced in May that it had completed its acquisition of rival travel deals firm Kayak, giving Priceline access to Android’s most-downloaded mobile travel app.

Sentiment is trending bullish within the brokerage community ahead of Priceline earnings. For instance, the second-quarter whisper number arrives at $9.65 per share — 28 cents higher than the consensus. Analysts have also doled out 25 “buy” ratings and two “holds,” with nary a “sell” rating to be found. What’s more, the 12-month consensus price target rests at $964.16, representing a sizable 39% premium to yesterday’s close at $927.58.

In other words, anything less than a stellar quarterly report could disappoint quite a few Wall Street bulls.

Outside of the brokerage bunch, short sellers have shown some disdain for Priceline. According to data from the most recent reporting period, some 3 million PCLN shares have been sold short, accounting for 6.2% of the stock’s total float, or shares available for public trading. While this is not enough for a massive short-squeeze situation, any rush to cover by these shorts could provide a bit of a boost to PCLN shares.

Looking at options data, short sellers don’t appear to be too worried about a PCLN rally. Typically, short sellers will buy call options to hedge their positions ahead of an event, such as earnings, to guard against an unexpected rally. With PCLN sporting an August/September put/call open interest ratio of 0.85, there is little evidence of heavy call buying prior to tonight’s report. In fact, with calls and puts in near parity among short-term open interest, I would say there is very little bullish enthusiasm among PCLN options traders.

Drilling down on this options activity reveals peak PCLN call open interest at the weekly August 990 strike, totaling 1,281 contracts. Arriving at a close second is the monthly August 960 strike, with 1,264 contracts, followed by the August 955 strike, with 1,035 contracts.

This latter grouping of August 955/960 calls looks suspiciously like some trader(s) have opened up bull call spread at these strikes … but in the absence of privileged information, this is only speculation.

On the put side, the heaviest accumulations arrive in the weekly August series, with the 845 and 900 strikes both sporting open interest in excess of 850 contracts. Remember, these weekly August options expire at the close of trading this Friday, making them quite speculative at this point. In the monthly August series, open interest at the 860 and 900 strikes totals roughly 750 contracts.

Overall, weekly August implieds are pricing in a post-earnings move of about 6%, down from PCLN’s average move of 7.75% during the past eight quarters. This places the upper bond for a post-earnings move near $980.90, with the lower bound arriving at $869.10.

Click to Enlarge Technically speaking, PLCN’s recent rally had placed the stock firmly above potential psychological support at $900. The shares maintain support at their 10- and 20-day moving averages — at $855.61 and $775.41, respectively — with long-term support near $705 in the form of their 50-day moving average. Resistance lies just overhead at $940, the site of PCLN’s all-time high, and at $1,000 above that.

Given PCLN’s strong price action, the lingering pessimism among short sellers and options traders, and the potential for Kayak’s mobile revenue to lift Priceline’s bottom line, I find it hard to bet against the brokerage community at this point (even though the wealth of “buy” ratings makes me a bit nervous).

Traders looking to take advantage of a potential post-earnings rally out of PCLN might want to consider a bull call spread, preferably in the September series to allow the trade more time to play out given that monthly August options expire at the end of next week. Taking cues from PCLN’s pre-market trading, and weekly August implieds, a September 935/980 bull call spread has pretty good potential.

At the close of trading on Wednesday, the September 935/980 bull call spread was offered at $18.30, or $1,830 per pair of contracts. Breakeven lies at $953.30, while a maximum profit of $26.70, or $2,670 per pair of contracts, is possible if PCLN closes at or above $980 when September options expire.

Since premiums are so high for near-the-money PCLN options, traders might also consider selling premium ahead of the earnings event. For instance, given PCLN’s technical performance and the expected post-earnings move from weekly implieds, an August 855/865 bull put spread has a good chance of finishing out of the money.

This spread was bid at $1.30, or $130 per pair of contracts, at the close of trading on Wednesday. The maximum profit is the premium received, while a maximum loss of $8.70, or $870 per pair of contracts, is possible if PCLN closes at or below $855 when August options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.